Cryptocurrency and Taxes: A Compliance Guide for Tech Startups and Investors

The single biggest crypto tax mistake I see is treating it like money. You spent some Bitcoin, you got paid in ETH, you swapped one token for another — felt like using a currency, so it didn't feel taxable. The IRS sees every one of those as a property transaction, and the gap between how crypto feels and how it's taxed is where almost every compliance problem starts.

So let's close that gap. This is the framework I walk through with both the investors and the startup founders I work with — and the rules tightened recently, so a few things you "knew" from a couple years ago may no longer be current.

The one rule everything flows from: it's property, not currency

Since Notice 2014-21, the IRS has treated virtual currency as property for federal tax purposes — not as cash. That single classification drives everything that follows. When you dispose of property, you have a capital gain or loss measured against your basis. Crypto is no exception.

And "dispose of" is broader than people think. A taxable event includes:

• Selling crypto for dollars.
• Trading one crypto for another — yes, swapping BTC for ETH is a taxable sale of the BTC, even though no cash touched your bank.
• Spending crypto on goods or services. Buying a laptop with appreciated Bitcoin is a sale of that Bitcoin first.

What's not taxable: buying crypto with dollars and holding it, or moving it between your own wallets. Holding and self-transfers don't trigger anything. It's the disposition that matters.

Gain is short-term (ordinary rates) if you held a year or less, long-term if you held longer — the same §1222 holding-period logic as any capital asset.

For investors: basis tracking is the whole ballgame

Your gain is proceeds minus basis (what you paid, §1012). Simple in theory, brutal in practice when you've made hundreds of trades across three exchanges and a hardware wallet. If you can't prove your basis, the IRS can treat it as zero — and then your entire proceeds are gain. Bad records here don't just cost you accuracy; they cost you money.

A few points that catch investors specifically:

The basis-tracking rules changed. Treasury moved taxpayers toward per-wallet/per-account basis tracking rather than a universal pooled method, with the change taking effect on January 1, 2025 (Rev. Proc. 2024-28, which also gives a safe harbor for allocating your existing basis to the wallets you hold). If you've been pooling everything together, your method may no longer be compliant — worth confirming before your next return.

The wash-sale gap. Because crypto is property and not a "security," the wash-sale rule under §1091 has not applied to it — meaning a tax-loss-harvesting move that would be disallowed for stocks (sell at a loss, rebuy immediately) has historically been allowed for crypto. This is a real planning tool, but it's been a repeated target of proposed legislation, so keep an eye on it: as of this writing no law has extended §1091 to digital assets, but bills to do so remain pending in Congress.

Income, not just gains. Some crypto shows up as ordinary income at fair market value when you receive it, not capital gain:

• Mining and staking rewards — taxable as ordinary income at FMV when you gain control over them (Notice 2014-21; Rev. Rul. 2023-14 for staking). That FMV then becomes your basis for the later sale.
• Airdrops and hard forks — income when you have dominion and control (Rev. Rul. 2019-24).
• Getting paid in crypto — ordinary income at FMV on receipt.

The trap: you owe ordinary income tax on staking rewards in the year you receive them, even if you never sold and even if the token's price later craters. Income tax now, capital loss later — and they don't net cleanly.

For startups: three places crypto hits your books

If you're a founder actually transacting in crypto, the exposure is wider than an investor's.

Paying people in crypto is still payroll. Pay an employee in Bitcoin and it's wages at FMV — subject to withholding, FICA, and W-2 reporting, exactly as if you'd paid dollars. Pay a contractor in crypto and it's 1099-reportable compensation at FMV. The crypto wrapper doesn't change the character of the payment, and "we paid the dev in ETH" is not a payroll-tax exemption.

Receiving crypto as revenue is ordinary income at FMV on the date received — and that FMV sets your basis, so when you later convert it to dollars, you've got a second taxable event (gain or loss) on top of the revenue you already recognized.

The GAAP treatment changed — and it's a real improvement. If you're holding crypto on your balance sheet and reporting under US GAAP, the accounting recently shifted to fair-value measurement under ASU 2023-08, replacing the old indefinite-lived intangible model that only let you write the asset down and never back up. ASU 2023-08 applies to fiscal years beginning after December 15, 2024. Under the old rules, a token you bought at $40,000 that dropped to $20,000 and recovered to $50,000 was stuck on your books at $20,000 — understating the asset and distorting your financials for any investor or lender reading them. The fair-value model fixes that. If you carry digital assets and you're raising or borrowing, this matters to how your statements present.

The reporting net is tightening

Two things to know:

The digital asset question. Form 1040 carries a yes/no digital-asset question right at the top. Answer it honestly — checking "no" while you've been trading is a clean, documented misstatement on a signed return, and it's a needless one.

Broker reporting (1099-DA). Exchanges are moving onto a new information-reporting regime — Form 1099-DA — with gross-proceeds reporting for transactions on or after January 1, 2025 (Forms 1099-DA issued in early 2026) and cost-basis reporting for covered assets acquired on or after January 1, 2026 (reported in early 2027). The practical takeaway: the IRS is now getting third-party data on your transactions, the way it long has for stock sales. The era of crypto being effectively invisible to the IRS is over, and unreported gains will increasingly generate automated notices.

The California layer

California conforms to the property treatment, so the same gains and income flow onto your state return — but with a sharper edge: California has no preferential capital-gains rate. Your crypto gains, short- or long-term, are taxed as ordinary income at CA rates up to the top marginal rate of 13.3%. A long-term federal gain you're taxing at a preferential federal rate gets no such break from the FTB. For high-volume traders in the South Bay, the state bill is often the one that stings more than expected.

What to actually do

• Use crypto tax software and reconcile it monthly, not in April. Pull complete transaction histories from every exchange and wallet while they're still accessible — exchanges shut down, and reconstructing basis after the fact is the nightmare scenario.
• Confirm your basis-tracking method is compliant under the current per-wallet rules before you file.
• If you're a startup, separate the three buckets — payroll, revenue, and treasury holdings — and account for each correctly, including the GAAP fair-value treatment if you report under GAAP.
• Don't guess on the moving parts. This area has changed materially in the last two years, and last season's approach may be this season's error.

This is general information, not advice for your specific facts, and reading it doesn't create a client relationship — and given how fast these rules are moving, verify the current-year specifics before you act on any of them. If you ever need to get transaction records to me, use the secure client portal, never email.

If you've got a wallet full of transactions you're not sure how to report — or you're a founder figuring out how to pay people, recognize revenue, or carry crypto on your books cleanly — that's exactly the kind of work I'd rather sort out with you during the year than untangle after a notice. Let's talk.